Following the implementation of the floating foreign exchange rate regime, the Nigeria Customs Service (NCS) announced a substantial change to the exchange rate used for calculating import duties. This change is in accordance with the directive from the Central Bank of Nigeria (CBN) for all inbound and outbound shipments, which took effect on July 5, 2023.
As a result, the customs portal now reflects a fluctuating exchange rate, with notable increases observed in recent times. For instance, the exchange rate for a dollar surged from N422.30 to N589. The rate further increased from N770/$ to N952/$, marking an overall 125.4% increment from its initial value (from N422.30/$ to N952/$).
The Central Bank of Nigeria (CBN) has also introduced a Price Verification System (PVS) in a document titled “Go-Live Of The Central Bank of Nigeria Price Verification System Portal,” which took effect on August 31, 2023. All applications for Form M shall be accompanied by a valid price verification report generated from the price verification portal.
These rapid and unpredictable changes have far-reaching implications for businesses, particularly importers, and pose significant challenges that need to be addressed. Some key impacts include:
Increased Import Costs: The most immediate and apparent impact on importers like you is the increase in import duty payable. With the Naira’s devaluation against major foreign currencies, the exchange rate used for calculating import duty has risen by 125.4% (from N422/$ to N925/$). This means that importers will have to pay more as import duty payable due to the change in the exchange rate. For instance, a shipment of $500 worth of items with a CIF of N211,000 when the exchange rate was 422/$, will now have a CIF of N476,000; the import duty will also be affected.
Reduced Profit Margins: The higher import costs directly translate to reduced profit margins for importers. As they need to spend more on clearing their goods, it becomes challenging to maintain previous pricing strategies without passing on the increased costs to customers. This could result in reduced competitiveness in the market or lower profitability for businesses.
Exchange Rates Volatility: The constant fluctuations in the exchange rate under the floating regime introduce a higher level of uncertainty and risk for importers. It becomes challenging to accurately predict and plan for future import costs, making financial planning and budgeting more complex.
Inflation: The rise in import costs due to the devaluation of the Naira can also pose inflationary effects on the economy. As importers pass on the increased expenses to consumers, it could lead to higher prices for goods and services, affecting the purchasing power of the general population.
Given the challenges posed by the implementation of the floating exchange rate regime, importers need to adapt and strategize to navigate this changing economic landscape effectively. Here are some key tips to consider:
Monitor Exchange Rates: Stay vigilant and regularly monitor exchange rate fluctuations. Being aware of currency movements can help you make informed decisions and plan for potential cost increases.
Review Pricing Strategies: Re-evaluate your pricing strategies and adjust them if necessary. While it might be challenging to avoid passing on increased costs to customers entirely, find a balance that maintains your competitiveness.
Customer Communication: Communicate openly with your customers about price adjustments resulting from currency fluctuations. Transparent communication can help maintain trust and loyalty.
Innovate: It’s time for business leaders to put on their enhanced thinking caps and devise ways of improving their business processes for better efficiency and better margins on their products.
Explore Improved Terms with Vendors: While exploring improvements in business processes, it’s also time to consider negotiating better service delivery and terms with your vendors.
